Georgia Bankruptcy Blog

Section 529 Plans are tax advantaged savings plans intended to encourage saving for future college costs. There are two types of qualified tuition programs: a prepaid tuition plan or a college savings plan They are authorized under Section 529 of the Internal Revenue Code (26 U.S.C. § 529).  Click here for a basic summary of 529 Plans. Are funds in the Section 529 Plans property of the Bankruptcy Estate when the account-holder/owner (usually a parent or relative of the child) files a Bankruptcy petition?

Section 541 of the Bankruptcy Code provides that the Estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case” except as provided in subsections (b) and (c)(2) of this section. 

Section 541(b)(6), added to the Code in October 2005 (the "BAPCPA" amendments) states that property of the estate does not include:

funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the petition in a case under this title, but –

(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were paid or contributed;

(B) with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such  amount as does not exceed the total contributions permitted under section 529(b)(7) of such Code with respect to such beneficiary . . .;  and

(C) in the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,475[.]

 In In re Bourguignon, Ch. 7 Case No. 09-00766-TLM (Bankr. D. Idaho Sep. 23, 2009) (click here to download opinion), the Court discussed the application of these Code sections.  Debtor opened a Section 529 Plan for their daughter on March 10, 2009, and deposited an initial $14,500 into the account.  Debtor's Mother subsequently added $40,000 to the account.  Debtors filed a Chapter 7 petition two weeks later. Debtors did not list the account in Schedule B or on their Exemptions.

The Court found that the Debtors had a legal interest in the account as of the petition date, and it was property of the Estate. It was not excluded under § 541(c)(2): 

Debtors’ argument that § 541(c)(2) is applicable to the College Account fails. That exception deals with restrictions on transfer “of a beneficial interest of the debtor in a trust[.]” There is inadequate proof of a qualifying trust interest of Debtors. Debtors are not the “beneficiaries” of the College Account; Christian Bourguignon is, instead, the account owner. Debtors’ daughter is the designated beneficiary. Even if Debtors arguably have a contingent, beneficial interest in the College Account because either could potentially become a beneficiary the College Account does not contain the requisite anti-alienation and anti-assignment provisions required under nonbankruptcy law and recognized by § 541(c)(2).

The Court then addressed Debtors' primary argument that the account is excluded under Section 541(b)(2). 

Focusing on the term “not later than” and urging the Court to treat it as synonymous with “within,” Debtors contend that “not later than 365 days before the date of the filing” as found in § 541(b)(6) means that “if funds were put into a 529 account LESS THAN ONE YEAR before the petition day, they are NOT property of the estate.” ... Debtors’ interpretation of the Code lacks merit.

The natural reading of § 541(b)(6) provides an exclusion from property of the estate for 529 accounts on a sliding scale. Assuming the qualifying conditions of § 541(b)(6)(A) and (B) are met, any such contributions made to a 529 account more than 720 days prior to bankruptcy are fully excluded from property of the estate. Such  contributions made between 365 and 720 days prior to bankruptcy are excluded from property of the estate to the extent below $5,47513 but any such contributions over $5,475 in that same time frame remain property of the estate. Any amounts contributed within a year of bankruptcy are not excluded at all from property of the estate…

Thus, for funds to be excluded from property of the estate under § 541(b)(6), they must be contributed to a 529 account at least a year before the filing of the bankruptcy, and, even then, there is a monetary cap on the excluded funds contributed between 365 and 720 days prior to the filing. It is only those funds contributed more than 720 days before filing that are excluded without a monetary limit. ...In sum, Debtors’ desired construction is not supported by the language of the statute, plainly read; any plausible policy rationale; or their own account documents.

 In addition to the funds contributed by the Debtor being property of the Estate, the Court also held that the $40,000 contributed by Debtor's mother was also Estate property. 

Section § 541(b)(6) makes certain funds contributed into a 529 account property of the estate and excludes others, but that distinction is based on the timing of contribution, not the source of the contribution. Indeed, during the September 3 hearing, Debtors conceded the Code makes no distinction based on the source of the contributions.

Debtors instead rely on the language of their College Account’s plan description, which states that “Contributions . . . by an Account Owner” made within a year of filing bankruptcy are part of the account owner’s bankruptcy estate and are available to creditors, but which does not mention a third party’s contributions. See Ex. 201 at 13. The plan description’s silence on the subject of third party contributions does not suggest differential treatment under § 541(b)(6). More importantly, the description cannot alter the language and operation of the Code. The Court concludes that the source of the funds in the 529 account is immaterial.

This should be a warning to grandparents and other relatives who want to contribute to a Section 529 Plan.  If the account owner files a Chapter 7 within two years of the contribution, you risk losing all or part of your contribution.   

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The new Means Test figures were recently released for cases filed on or after November 1, 2010.  The Georgia figures are below, and you can see the entire chart on the U.S. Trustee's website.

        * Add $6900 for each additional dependent.

"Updated" Means Test Numbers for October 1, 2008.  If the numbers look similar, it is because they did not change.

        * Add $6900 for each additional dependent.

You can get the full list for all states at the United States Trustee Website. 

By: Scott B. Riddle, Esq.

From todays AJC -

A campaign to stem rising numbers of foreclosures locally and statewide was announced Wednesday by metro Atlanta civic leaders and elected officials.

Free counseling and a 24-hour hotline will be offered through the 1-888-995-HOPE campaign to help homeowners avert foreclosure.

In 2006, metro Atlanta ranked second among urban areas nationwide in its foreclosure rate, according to RealtyTrac, a national foreclosure database. Georgia consistently ranks among the top states for foreclosures per household in RealtyTrac's monthly reports.
...
The 1-888-995-HOPE hotline will offer free, confidential advice in English or Spanish from counselors who can provide referrals and information about how to work out a plan that can avoid foreclosure.
...
Suzanne Boas, president of Consumer Credit Counseling Service of Greater Atlanta, said the foreclosure hotline is the first partnership of its kind in the nation.

"We are looking at and other people are looking at how to replicate this across the country," Boas said.

Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)

I can't attest to the accuracy of this, but you can find an online means test calculator by clicking here.  It is not a replacement for sitting down with a lawyer, but may provide individuals some idea how close they are to qualifying for a Chapter 7 case.  Keep in mind that most recent studies show that a large percentage of people who filed Chapter 7 under the old law (pre-October 2005) would still be eligible under the BAPCPA.

Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)

Note: The following is a reprint (retyping) of a Guide for Consumer Bankruptcy in Georgia.  There are several sections, and I hope to get them all posted over the next couple of weeks as I review them and note any changes because of the new law or recent court decisions.  I also hope to make the entire document available in .pdf form.  Questions and comments welcome. 

GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA

I. Introduction

The purpose of this Guide is to provide practical information about consumer Bankruptcy, and more specifically, consumer Bankruptcy cases filed in the State of Georgia. This includes Bankruptcy cases filed under Chapter 7 and Chapter 13 of the Bankruptcy Code. Although individuals may also filed under Chapter 11, those cases are relatively infrequent and require specialized advice from a Bankruptcy lawyer. While much of the information contained in this Guide is relevant to a Chapter 11 individual Debtor, we do not separately discuss Chapter 11 cases.

We have tried to use a minimum of legal-ease, but it is important to identify and define many of the common terms unique to Bankruptcy cases. 

Although this Guide is written primarily for those individuals who may be contemplating filing for Bankruptcy, it is not a substitute for advice from a qualified Bankruptcy lawyer who has reviewed the facts and circumstances of a particular case. Rather, this Guide should be used as basic information or as a primer for preparing for a meeting with a lawyer. 

II.        What is Bankruptcy?

The term “Bankruptcy” has its origins in Latin: “Bancus,” meaning bench or table, and “ruptus,” meaning broken. In ancient times, many businesses were conducted from benches or tables. If the business failed, the bench was broken.  Thus, the two terms were combined to form the modern word “bankruptcy,” or “broken bench.” The word has since been used to refer to the absence of a quality or resource – “financially bankrupt,” “morally and ethically bankrupt,” etc.

For purposes of this Guide, the term “Bankruptcy” will refer to the process under federal law designed to help consumers and businesses eliminate their debts or repay them under the protection of the United States Bankruptcy Court, which is a federal court. For individuals, the process is initiated by the filing of a Bankruptcy Petition under Title 11 of the United States Code. The Petition is filed under either Chapter 7, Chapter 11, or Chapter 13 of the Code, and each of these chapters are discussed below. The term “debtor” will refer to an individual who has filed a Bankruptcy Petition.

You may hear the term “fresh start” used as describing the goal of Bankruptcy.

Scott B. Riddle, Esq.

404-815-0164

sbriddle@mindspring.com

Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)

Note: This is the next section in the Consumer Guide to Bankruptcy in Georgia, re-typed for the Blog.  Comments and questions welcome.

                                  GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA

I. Introduction

II. Chapter 7 Cases

III. Chapter 13 Cases

IV.  Exemptions: What Can I keep?

One of the most important factors in deciding whether to file for Bankruptcy and, if you are going to file, under which Chapter, is what do you get to keep? The answer to this question can often be answered by looking to the exemptions allowed under the law.

Exemptions are, simply stated, what individuals are allowed to keep in a Bankruptcy case or in a collection action filed by creditors. In Georgia, these exemptions are set out in state law. Remember, in a Chapter 13 case, you may be able to retain all of your personal property, even if it is non-exempt. This is one of the advantages of Chapter 13.  However, practically speaking, most consumer debtors will end up keeping all or most of their property in a Chapter 7 because it is subject to exemptions or because any non-exempt property would not be worth the time and expense involved in selling it. 


1.  What Property Can I Exempt?

The following is a short list of the most common exemptions allowed under the law. It is important that you disclose all property to your Bankruptcy lawyer (as required by law), so that your lawyer can provide specific advice regarding what you may exempt. The reality is that most individual debtors will be able to retain most or all of their property in a Chapter 7 or 13.  

Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)

Note: This is the next section in the Consumer Guide to Bankruptcy in Georgia, re-typed for the Blog.  Comments and questions welcome.

                                  GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA

I.  Introduction

II. Chaper 7 cases.

III.  Chapter 13

Chapter 13 Bankruptcy is often referred to as “reorganization” or “wage earner’s plan,” and is initiated by filing a Chapter 13 Petition in Bankruptcy Court.  The Petition may be filed by an individual or jointly by a husband and wife.

 Chapter 13 differs from Chapter 7 in two primary respects. One, unlike a Chapter 7 Debtor, a Chapter 13 Debtor submits a Plan by which the Debtor will pay some or all of his debts over a period of time (at least three, usually five years). The second primary difference is that a Chapter 13 Debtor is able to retain some, if not all, non-exempt assets that would otherwise be sold by the Trustee in a Chapter 7 case. Thus, if a Debtor completes the Plan, he will likely be able to keep all of his assets and receive a discharge of most or all of the debt not paid through the plan (except debts that are secured or non-dischargeable).

Upon the filing of the Petition, a Chapter 13 Trustee will be appointed and a first meeting of creditors will be scheduled within a month of the filing. Prior to this meeting, the Debtor will be expected to submit a plan and make plan payments to the Chapter 13 Trustee even though the plan has not yet been confirmed by the Court. 

The first meeting of creditors is a formal meeting (not a court hearing) conducted by the Chapter 13 Trustee and provides an opportunity for the Trustee and creditors to ask questions about the Debtor’s petition, schedules or plan. It is also an opportunity for the Trustee to identify any problems or potential objections to the plan so that they may be corrected prior to the confirmation hearing.

A confirmation hearing will be scheduled a few weeks after the first meeting of creditors. If there are no objections to the plan, or all objections are resolved prior to the hearing, the plan may be confirmed without the Debtor appearing at the hearing, depending on local practice and the facts of the case. The Debtor’s attorney will determine whether the Debtor must attend.  

Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)

Note: This is the next section in the Consumer Guide to Bankruptcy in Georgia, re-typed for the Blog.  Comments and questions welcome.

                                  GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA

I.   Introduction

III.        Types of Bankruptcy

1.     Chapter 7

Chapter 7 Bankruptcy is often referred to as “liquidation,” and is initiated with the filing of a Chapter 7 Bankruptcy Petition.  In its most simple form, Chapter 7 involves the Debtor surrendering all non-exempt assets to the Trustee so the Trustee can sell the assets and distribute the proceeds to the creditors, and in return, the Debtor receives a discharge of most or all unsecured debt.

A Chapter 7 case may be filed by an individual, or jointly by a husband a wife. When the Petition is filed, a Chapter 7 Trustee is appointed to administer the assets of the bankruptcy estate. The estate generally consists of the Debtor’s property that is not subject to exemptions (discussed in detail below). A Chapter 7 case is usually the shortest case in duration, and a Debtor often receives a discharge of some or all debts in just a few months. 

Often, the Debtor will not have to attend and court proceedings other than the first meeting of creditors.  This meeting is an opportunity for the Chapter 7 Trustee and creditors to ask questions about the Debtor’s petition and schedules, and other issues related to the filing. Most creditors do not attend the meeting, but it is not uncommon for larger creditors to attend and ask questions.

In practice, Debtors are in bankruptcy precisely because they do not have significant assets they can sell to pay debts or because they have already sold the property to stay afloat. Many, if not most, Chapter 7 Debtors get to keep all of their property because the property is subject to exemptions or because the Chapter 7 Trustee believes that the value of the nonexempt property is not worth the time and expense involved in selling the property and distributing the proceeds to creditors. For example, a Debtor may own a home worth $200,000 and the equity (value of the property minus the amount owed on the secured loan) in the home is $25,000. Under Georgia law, a Debtor may exempt $10,000 in equity in the home, leaving nonexempt equity of $15,000. In theory, the Chapter 7 Trustee could seek a sale of the house to obtain the $15,000 in nonexempt equity to distribute to creditors. However, in practice, the attempted sale of the house may lead to a sale price below market value due to the necessity of a quick sale, and the real estate commissions, closing costs and attorney’s fees will often be far more than the $15,000 the Trustee hoped to collect. The same analysis applies to other items, such as clothing, furniture, some jewelry, sporting goods and other household items. 

What property will the Trustee claim for the estate? This is determined on a case by case basis, but some examples are excess equity in a primary residence; equity in other real property owned by the Debtor; stamp, coin or firearm collections; automobiles owned free and clear not subject to exemptions; boats, campers and other recreational vehicles; jewelry and furniture in excess of exemptions; stocks and bonds and other interests in corporations or businesses; and, the Debtor’s interest in pre-petition causes of action against others (for example, claims for damages arising from pre-petition automobile accidents, claims against employers, or other claims for recovery). A Bankruptcy lawyer will review a Debtor’s personal property and will be able to determine the likelihood that the Trustee may want to sell some of the property.